Cisco 2004 Annual Report Download - page 52

Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing
services for its products. During the normal course of business, in order to manage manufacturing lead times and help assure adequate
component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure
inventory based upon criteria as defined by the Company or that establish the parameters defining the Company’s requirements. In
certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based
on its business needs prior to firm orders being placed. Consequently, only a portion of the Company’s reported purchase commitments
arising from these agreements are firm, noncancelable, and unconditional commitments. As of July 31, 2004, the Company had total
purchase commitments for inventory of approximately $951 million, compared with $718 million as of July 26, 2003.
In addition to the above, the Company records a liability for firm, noncancelable, and unconditional purchase commitments for
quantities in excess of its future demand forecasts consistent with the Company’s allowance for inventory. As of July 31, 2004, the
liability for these firm, noncancelable, and unconditional purchase commitments was $141 million, compared with $99 million as of
July 26, 2003 and was included in other accrued liabilities.
Other Commitments
In fiscal 2001, the Company entered into an agreement to invest approximately $1.0 billion in venture funds managed by SOFTBANK
which are required to be funded on demand. In fiscal 2003, this agreement was amended to reduce the amount of the Company’s
commitment to $800 million, of which up to $550 million is to be invested in venture funds under terms similar to the original agreement
and $250 million invested as senior debt with entities as directed by SOFTBANK. The Company’s commitment to fund the senior debt
is contingent upon the achievement of certain agreed-upon milestones. As of July 31, 2004, the Company had invested $290 million
in the venture funds, compared with $247 million as of July 26, 2003. In addition, as of July 31, 2004 and July 26, 2003, the Company
has invested $49 million in the senior debt, of which $19 million has been repaid.
The Company provides structured financing to certain qualified customers for the purchase of equipment and other needs through
its wholly owned subsidiary, Cisco Systems Capital Corporation. These loan commitments may be funded over a two- to three-year
period, provided that these customers achieve specific business milestones and satisfy certain financial covenants. As of July 31, 2004,
the outstanding loan commitments were approximately $61 million, of which approximately $22 million was eligible for draw-down.
As of July 26, 2003, the outstanding loan commitments were approximately $97 million, of which approximately $38 million was
eligible for draw-down.
As of July 31, 2004, the Company has a commitment of approximately $59 million to purchase the remaining minority interest
of Cisco Systems, K.K. (Japan), compared with approximately $130 million as of July 26, 2003.
The Company also has certain other funding commitments related to its privately held investments that are based on the achievement
of certain agreed-upon milestones. The funding commitments were approximately $67 million as of July 31, 2004, compared with
approximately $95 million as of July 26, 2003.
Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides structured financing to
certain customers through its wholly owned subsidiary, Cisco Systems Capital Corporation, which are considered to be variable
interest entities. The Company has evaluated its investments in privately held companies and structured financings and determined
that there were no significant unconsolidated variable interest entities as of July 31, 2004.
Guarantees and Product Warranties
FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability
for the fair value of the obligation it assumes under that guarantee.
The requirements of FIN 45 are applicable to the Company’s product warranty liability and certain guarantees. The Company’s
guarantees issued subject to the recognition and disclosure requirements of FIN 45 as of July 31, 2004 and July 26, 2003 were not
material. As of July 31, 2004 and July 26, 2003, the Company’s product warranty liability recorded in other accrued liabilities was
$239 million and $246 million, respectively. The following table summarizes the activity related to the product warranty liability during
fiscal 2004 and 2003 (in millions):
July 31, 2004 July 26, 2003
Balance at beginning of fiscal year $ 246 $ 242
Provision for warranties issued 333 342
Payments (340) (338)
Balance at end of fiscal year $239 $246
2004 ANNUAL REPORT 55